UK OUTPERFORMS EUROPE IN WEALTH CREATION

5 Apr 2004 04:00 AM

Wealth creation amongst UK companies is up - and increasing faster than the rest of Europe, according to the 2004 Value Added Scoreboard, published today by the DTI.

The scoreboard, which lists the value added (wealth created) for the top 600 European and top 800 UK companies, is good news for UK business. Since last year, value added by the top 800 UK companies has increased by four per cent compared with a one per cent increase by the European top 600.

There are more UK companies in the European 600 than any other country (165) with a combined value added of 315bn. Second is Germany with 89 companies (295bn), followed by France with 83 (246bn).

As a group, the value added for the 165 UK companies in the European 600 increased by five per cent. In comparison, the 89 German companies increased their value added by one per cent and the value added for the 83 French companies dropped by one per cent.

Patricia Hewitt, the Secretary of State for Trade and Industry said:

"These results show the UK's strong position in Europe, and are very encouraging. Efficient wealth creation and re-investment by business is vital to the continued growth of the UK economy and our future prosperity.

"The scoreboard highlights the importance of investment in R&D, skills, brands and market development."

The wealth created by a company, measured as value added, is defined as sales less the cost of bought-in materials, components and services. The scoreboard ranks companies by their value added, and also gives details of sales, profits, productivity and efficiency, cost of funds, investment in R&D and capital expenditure (Capex) and market capitalisation.

Another measurement covered by the scoreboard is 'value adding efficiency'. The UK 165 have a value adding efficiency some 12 per cent higher than the European 600, reflecting their higher efficiency in creating wealth.

The importance of value added can be seen by stock market performance. A share portfolio of 15 UK companies (one from each of the larger UK sectors) with high value adding efficiency and good value added growth, outperforms the FTSE All-Share index considerably. Over the last five years the portfolio of the 15 companies has increased its market value by 120 per cent whereas the FTSE All-Share index has decreased by 16 per cent.

Dr Mike Tubbs, a senior industrialist with the DTI Business, Finance & Investment Unit and author of the report, said:

"The scoreboard is designed to be a benchmarking tool for companies to see how they compare to peers in their sector across the UK and Europe and to decide on the appropriate way to distribute their value added.

"The wealth created (value added) by a company is used to reward the stakeholders and to sustain and develop the business. UK companies showed a strong Value Added growth this year, which is very encouraging."

Notes to Editors

1. Value added (VA) is defined as the difference between sales and the cost of bought-in materials, components and services. However, the data needed to calculate VA in this way is rarely given in annual reports so an alternative approach is used which gives the same result for a company's value added.

Value added = Operating Profit + Employee costs + Depreciation & Amortisation (depreciation of intangibles)

Where operating profit or loss is defined as profit before tax and dividends plus net interest paid (or minus net interest received) and for the purpose of calculating VA, net of certain exceptional items (specifically the profit or loss arising from disposal of a subsidiary or asset).

2. This is the third annual edition of the DTI's Value Added Scoreboard.

3. While VA is a valuable output measure of the wealth generated by a company's activities, it is only one measure of company performance. A balanced assessment should always include several performance measures.

4. Only the 800 largest UK and 600 largest European companies, by Value Added (VA), are included in the scoreboard. A company needs over 54 million of VA to be included in the UK 800 and over 405 million for the European 600.

5. US and Japanese companies are not included because they do not give enough information in their annual reports to allow VA to be calculated. A few European companies are also in this situation, either because they follow US accounting practice or because reporting on private companies varies widely across countries.

6. Value adding efficiency (the efficiency with which wealth is created) is value added (the output) divided by the sum of employee costs and depreciation (the major inputs). The result is expressed as a percentage that is thus independent of exchange rates.

7. Companies mainly use this figure since it can be used for subsidiaries in different countries (independent of currency), allows for the cost of both labour and equipment, allows for part-time employees and recognises that higher skills are rewarded by higher remuneration.

8. For sectors where investment is important, three-quarters of companies with value adding efficiency above average for their sector also have investment intensity above the sector average.

9. This year new data has been included in the scoreboard, which enables the distribution of value added to be tracked between its main uses. These are: cost of funds (interest, dividends), corporation tax on profits, operating employee costs, investment (R&D plus depreciation of capital expenditure), amortisation (largely of acquisition goodwill) and retained value added (which is the value added left after the first five uses; it is negative for some companies).

10. The Value Added Scoreboard 2004 can be found at
www.innovation.gov.uk

11. Hard copies are available from DTI publications, Tel: 0870 150 2500

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